To make a batch of 800 units, it is estimated that 90 direct labor hours are req

Question

To make a batch of 800 units, it is estimated that 90 direct labor hours are required at a cost of $14 per hour. Direct material costs are estimated at $1,500 per batch. The overhead costs are calculated based on an overhead rate of $7.50 per direct labor hour. The item can be readily purchased from a local vendor for $5 per unit.

1. Should the item be manufactured or purchased?

2.What is the break-even value for the overhead rate (dollars per direct labor hour)? Assume that the material costs, labor hours, and labor costs do not change.

Explanation / Answer

Total cost to make 800units is 90*14+1500+7.5*90=3435

1) if manufactured product quabtity demand is less than 687 then product should be purchased and if greater than 687 then product should be manufactured.

2) Breakeven value of overhead should be

TC=800*5=4000 and actual cost=3435

More additional cost reqd. to make 4000 is 565 and total labor=90

Thus 565/90=6.277 additional $ per labor is required as to break even.

Thus overhead labor cost=6.277+7.5=13.778

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.